What route should I take

Neither. Talk with an accountant ASAP. You likely can do a Simple or a SEP, and put away far more than what an IRA or Roth will let you put away. And you get a fantastic tax break in the process. There are other such plans out there--get professional advice on what is best for you.

Bad, bad, bad plan (the plan of not having any current retirement savings). The tax break for small business people to save for retirement is one of the single largest tax breaks available. Missing out on that is a huge mistake. If you have missed out on this in previous years, you need to fire your accountant. If you are your own accountant, that goes double--fire yourself. Any kind of accountant here will save you far more than what he or she will cost.

-john-

Yes here's my question; Are you aware of the SEP IRA?

As an independent contractor I believe you are eligible for the SEP IRA. Regular IRA limit for you is $4k, SEP IRA limit is 25% of compensation up to $44,000 total deposit. (for you it's 20% of $78K or $15.6, the math work out this way). If your goal is to save more than the $4k, this is the way to go.

JOE

Or even better, a solo 401(k), which will let him contribute potentially $15K beyond what he can contribute to a SEP.

If I read IRS Pub 560 correctly, the $15K elective salary deferrals in an individual 401k comes out of the same total limit $44K (for 2006) that applies to SEP.

The worksheet provided in the pub, along with variants I have seen from investment firms, makes this all clear as mud. It's my impression (which I would like to have proven wrong) that it is very easy to miscalculate and end up contributing and deducting more than you are actually allowed to with an individual 401k.

-Mark Bole

Nifty comparison chart for you:

You have more choices than just an IRA.

You have done an excellent job saving and not spending the money you earn.

suggestion 1: keep 6 months expenses in cash account. Figure out what you spend each month (food, rent, utilities, debt payments) and multiply by 6. Keep this money in the CDs (have 6 CDs, one maturing every 6 months for example) or in the savings account. The idea is if you stop working, for a short period, you will not go broke.

suggestion 2, fund a retirement account. I would suggest making sure at least 10% ($7800) get set aside for retirement each year. SEP or Roth would be the two account types I would consider. Reasons: SEP allows you to contribute more and gives you an immediate tax break (I assume this works like 401k and if you contributed 7800, you would get taxed on 78000-7800p200 each year). You would have to pay taxes on withdraws in retirement. Roth allows a max contribution of 4k per year (increases to 5k in

2008). The 4k is in "after taxes". Meaning you will pay tax the year you earn the money. Qualified Roth withdraws are tax free.

step 3- keep up the good work of saving and spending less than you earn.

If you expect to make more money in retirement than you do while working, a Roth makes a lot of sense (pay taxes when tax rates are lowest). However betting on future tax rates is a "risk". Using the SEP gives you a current tax break the year you earn the money. less risk in that regard.

If you used a "solo 401k", I would expect you could contribute to both the Roth and solo 401k (I contribute to a 401k and Roth each year, I expect rules would be similar for your situation). I am not sure if a person can contribute to both a Roth IRA and SEP IRA in the same year.

If the goal is to maximize permitted contributions (and I'm not sure that it is, because the maximum permitted by law may be more than OnMyOwn can afford to contribute), then use an individual (solo)

401(k). This allows the same contributions by the "company" (the, um, contractorship) as a SEP ($15.6K), and allows an additional $15K in "employee" contributions.

There are various downsides to an individual 401(k) - additional filings once the total value exceeds $100K, you can't simply leave it sitting and open a SEP next year (but you can do the reverse - open a SEP one year, leave it sitting and open a solo 401(k) the next year), etc. But it is the way to maximize permitted contributions.

The employee contributions (up to $15K) can be made into a Roth 401(k), meaning that the original question - Roth or deductible - still remains unanswered. My short answer is: if your goal is to maximize contributions, then a Roth vehicle lets you contribute more (because you are contributing more valuable post-tax dollars), but if you are not going to max out, then there is no difference, assuming that tax rates now and in retirement are the same. Given the current sizeable budget deficit, and the fact that tax rates now are historically low, I expect taxes in the future to be higher, long term, on average. That would suggest prepaying taxes (Roth) is a good idea. But who knows for sure?

Finally, someone else mentioned a SIMPLE. The deadline for opening one this year is already past.

1420,00.html#5 of different self-employed plans) (T. Rowe Price offers individual Roth 401(k) plans)

They have the same MAXIMUM limit, yes. But if you're not making enough to hit the maximum, the solo 401(k) is a win.

Example: if you are a sole proprietor and your net earnings (after SE tax) are $80,000:

• A SEP-IRA would let you put away 20% x ,000 = ,000

• A solo 401(k) would let you put away ,000 + 20% x ,000 = ,000

[The 20% is not a typo -- because for sole proprietors the figure that you take 25% of is computed after the 25% contribution. When you solve the recursion formula, it comes out to 20%. See IRS Pub 560.]

(1) I have heard rumors that the Pension Protection Act increased the filing threshold to $250K. Is that true? (2) A solo 401(k) can file a 5500-EZ, which doesn't appear to be a particularly annoying form, plus many solo 401(k) custodians will give you all the info/docs/numbers you need to fill out the form.

Can you explain more what you mean by "you can't simply leave it sitting"? Certainly the deferral contribution can be $0 (since it is elective). Is there a mandatory "employer" contribution?

Seems to be. Thanks for the tip.

2546 According to the Joint Committee On Taxation's paper "Technical Explanation of HR 4, 'The Pension Protection Act of 2006'", the Act directs the Secretary of the Treasury to "modify the annual return filing requirements ... [so that] if the total value of the plan assets ... at the end of the plan year does not exceed $250K, the plan administrator is not required to file a return." (p. 254, pdf p. 264)

I agree it shouldn't be too difficult, but it's a lot worse than opening a SEP-IRA, and many sole proprietors loathe doing any paperwork (that's just not why they are in business). Agreed that the EZ *is* a whole lot simpler than the full 5500.

Not that I know of, but the plan still exists unless you formally shut it down (terminate it). Beyond that, I may have overstated the consequences, and I'm still checking. (Having converted the 401(k) plan at my last company from one provider to another, I tend to have an automatic negative reaction to anything that says "terminate a 401(k) :-)